B. H. Liddell Hart: Why We Fail to Learn from History

B.H. Lidell Hart spent a lifetime writing about the history of military strategy and war. He summarized the many lessons in his writings in a little book called Why Don’t We Learn from History?.

The book is meant as a summary of the history of warfare, but it’s much more than that. It’s easily translatable to lessons on life, business, and investing.

Only Hart presents it with an inverted view of the repeated mistakes of history deeply rooted in human nature.

The book is filled with a lot of lessons and great quotes. So I pulled a few favorites out and added my two cents below each:

History can show us what to avoid, even if it does not teach us what to do — by showing the most common mistakes that mankind is apt to make and to repeat.
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History is the record of man’s steps and slips. It shows us that the steps have been slow and slight; the slips, quick and abounding. It provides us with the opportunity to profit by the stumbles and tumbles of our forerunners.

This never gets old. Learning what not to do is a huge advantage in investing.

The value of history is in the countless repeated ways people screw up. If we bother to study the screw ups there’s a hope that we avoid making the same mistake twice.

The unique thing about studying history is the immediate lesson that there’s nothing unique about “tough times.” History is filled with how things went wrong, mistakes were made, and people recovered. The lesson: there’s no reason to panic, it’s temporary.

It helps us to realize that there are two forms of practical experience — direct and indirect — and that, of the two, indirect practical experience may be the more valuable because infinitely wider. Even in the most active career, especially a soldier’s career, the scope and possibilities of direct experience are extremely limited…

Direct experience is inherently too limited to form an adequate foundation either for theory or for application. At the best it produces an atmosphere that is of value in drying and hardening the structure of thought. The greater value of indirect experience lies in its greater variety and extent. “History is universal experience” — the experience not of another but of many others under manifold conditions.

This has everything to do with learning as effectively as possible. Nothing is a better teacher than feeling the pain points personally. If it hurts, you’ll never forget it. Except, first-hand losses are a great, but inefficient teacher.

Markets rarely offer a crash course education. Direct experience takes time, over many market cycles. And because each cycle is different, the lessons learned from one, may not be helpful in the next.

Indirect experience is the most efficient, least costly way to learn. Because mistakes are our greatest teacher, learning from someone else’s is always better for your portfolio. So, if you’re a long-term investor, you should have ample free time to read, learn, and practice your skills while you patiently sit around and wait to experience it first-hand.

A sound rule of historical evidence is that while assertions should be treated with critical doubt, admissions are likely to be reliable. If there is one saying that embodies a general truth it is “No man is condemned save out of his own mouth.” By applying this test we can go a long way toward a clear verdict on history and on history in the making.

Investing is like social media — the wonderful things that happen to us get shared the most. It allows us to present an extremely filtered view of our reality.

Everybody loves to talk about the investments they made a killing on. Few people talk about their worst losses. It paints a false picture of performance.

A worst-case outcome of these one-sided views is we fool ourselves in the process. We chalk up one-off wins to skill. We write off losses to bad luck. It leads to overconfidence, unnecessary risks, and repeated mistakes. And it leads to the biggest mistake of all:

All of us do foolish things — but the wiser realize what they do. The most dangerous error is failure to recognize our own tendency to error. That failure is a common affliction of authority.

The wise investors humbly admit to stupidity all the time. They know not every investment will work out. They know losses are part of the process. They know luck plays a role. They understand where their abilities end. There is something to be said for honest self assessment…and being critical of what you see on social media.

The cause of most troubles can be traced to excess; the failure to check them to deficiency; their prevention lies in moderation.

This perfectly describes the emotional forces behind every asset bubble ever…and how to avoid it. It equally explains common personal finance problems around spending, debt, and investing. The same is true for balancing time between work, life, etc.

Too much of one thing creates an imbalance, that creates problems that fester and spread unless it’s brought back into balance.

An intellectual ought to realize the extent to which the world is shaped by human emotions, emotions uncontrolled by reason — his thinking must have been shallow, and his observation narrow, if he fails to realize that. Having once learned to think and to use reason as a guide, however, he cannot possibly float with the current of popular emotion and fluctuate with its violent changes unless he himself ceases to think or is deliberately false to his own thought. And in the latter case it is likely that he will commit intellectual suicide, gradually, “by the death of a thousand cuts.”

The biggest mistake investors make is believing behavior has little impact on performance. Almost as bad is believing it has little impact on markets.

The reason nobody has found the holy grail of investment strategies is because it is too obviously simple to be believed. Ben Graham wasn’t the first to write about it, but the simplicity of it is probably why so many people glossed over it:

We shall say quite a bit about the psychology of investors. For indeed, the investor’s chief problem – and even his worst enemy – is likely to be himself. (“The fault, dear investor, is not on our stars – and not in our stocks – but in ourselves…”)

The best-laid strategies produce the worst results if we misbehave. You can be the smartest, most gifted person ever about all things investing, but if you ignore the role human nature plays in investing and the markets, you’ll fall victim to it yourself.